The Hennessey Venom GT vs the Yugo – and emerging Asia takes the lead…
If global economies were cars, emerging Asia is one of the world’s fastest vehicles. And the developed world is the automotive equivalent of a glorified> READ MORE
If global economies were cars, emerging Asia is one of the world’s fastest vehicles. And the developed world is the automotive equivalent of a glorified> READ MORE
U.S. President-elect Donald Trump has made it clear that he's no friend of Asia. But ironically, in some ways President Trump could be a big boost for China. We've> READ MORE
Throughout human history, garlic has been used as a spice and as medicine. It's a staple in the Asian diet, part of everything from monosodium glutamate (MSG) to> READ MORE
One rare constant in global markets is China's never-ending stream of contradictory signals. On the "worry" side of the ledger, consider that. China's Shanghai> READ MORE
If global economies were cars, emerging Asia is one of the world’s fastest vehicles. And the developed world is the automotive equivalent of a glorified lawnmower on wheels
Just 15 years ago, the traditional troika of the world’s developed regions – the U.S., Japan and Europe – accounted for just over half of all industrial production. That means that half of the world’s manufacturing (everything from iPhones to rocket engines), mining (gold, rare earth metals, and everything in between), and utilities (like electricity and gas) were generated in these areas.
Emerging Asia, meanwhile – China, India, and nearly all of the dozens of other countries in the region, from Vietnam to Sri Lanka – accounted for just 14 percent. That figure was well below U.S. and European shares of the global industrial production pie, as shown below.
Since 2001, global industrial production grew overall by about 50 percent, or about 2.6 percent growth per year. And it’s up about 25 percent from the depths of the 2008-2009 global economic crisis.
Where did that growth come from?
About three-quarters of global industrial production growth came from emerging Asia. As shown below, the region’s share in total industrial production rose by nearly three times, to account for just over one-third of the world’s industrial output. Meanwhile, the combined share of the U.S., Europe and Japan fell to just 37 percent.
In relative terms, emerging Asia is a Hennessey Venom GT– and the developed world is sputtering along in a 31-year-old Yugo. According to Asianomics Group, an independent research company focused on the Asia-Pacific region, emerging Asia’s industrial output has grown 270 percent since 2001, and accounted for three-quarters of the total increase. Japan’s industrial output is flat, Europe’s is up 5 percent, and industrial output in the U.S. rose just 12 percent over the same period.
What’s next for the Hennessey Venom GT?
Over the past 15 years, a lot of the “easy” growth has been accomplished in emerging Asia. Countries in early stages of economic development tend to have favourable demographics (lots of young, low-skilled workers) and under-exploited resources that make economic growth “easy”. As an economy develops, these advantages diminish and the base upon which future growth has to happen is a lot bigger. You just can’t argue with the law of large numbers.
The law of large numbers says something that’s already big can’t continue to grow at a rapid pace forever. For example, it isn’t easy, but it’s possible for a company that generates US$1 billion in revenue to double its sales. But for a company that generates hundreds of billions of dollars in revenue (think of Apple or the Bank of China) doubling revenue is a far greater challenge.
What does that mean for emerging Asia’s future growth? The economy of China – by far the biggest in emerging Asia – was about 7 times bigger in 2016 than it was in 2001 (calculated in purchasing power of parity terms). It’s grown an average of 10 percent per year since 1991. But the base of that growth has been rising. For instance, in the early 2000s, China growing by 10 percent was like adding the equivalent of an economy the size of Kuwait’s every year. Now, growing about 6 percent per year is like adding on four Kuwaits per year. That’s a lot more difficult.
However, as we’ve written before, China’s industrial production is holding steady and its manufacturing industry has been expanding since January of last year – both signs indicate that the largest economy in Asia won’t give up too much ground any time soon.
Emerging Asia isn’t going to continue to eat the developed world’s lunch in terms of industrial production growth forever… it won’t be a Hennessey Venom indefinitely. But it’s still going to go a lot faster than the Yugo. And in the meantime, investors would be smart to focus a lot of their energy on Asia.
U.S. President-elect Donald Trump has made it clear that he’s no friend of Asia. But ironically, in some ways President Trump could be a big boost for China.
We’ve written about how Asia has a lot to lose under President Trump (click here to see our free special report on the topic). Most of Asia’s economies are heavily reliant on foreign trade. A trade war with China and a steep tariff on Chinese imports – as promised by Trump – could seriously damage what’s been the foundation of a generation of growth for much of Asia. Also, an American retreat from Asia could disrupt the fine geopolitical balance between – for starters – China and Taiwan, and North Korea and South Korea.
But China – which has been a victim of President-elect Trump’s verbal wrath and Twitter temper – may actually benefit in three ways.
1. China becomes the grown-up in the room
To varying degrees, for much of the twentieth century, the U.S. has often been a voice of reason on the international stage. Although it has – of course – always advanced its own interests first and foremost, it’s also often used its dominant geopolitical and military position to advance ends that are, broadly speaking, legitimised by the international community.
But indications so far suggest that under Donald Trump – who makes a sport of picking fights with anyone who upsets him, from air conditioning companies to civil rights icons to former beauty queens – the U.S. won’t assume that responsibility.
Trump’s comments have received criticism around the world. This year’s annual World Economic Forum (WEF) meeting in Davos was a perfect example of how China is filling the void left my Trump to take on a “grown-up” role in the theatre of global politics.
At the forum, in response to Trump’s inflammatory threats to abandon the Paris accord on climate change, President Xi Jinping defended the agreement. He called it “a hard-won agreement” that “all signatories should stick to”.
What does this mean? If the U.S. relinquishes its moral authority as the voice of reason, China is a prime candidate to take it over. China has the size and strength. And if it continues to sound reasonable (see below), it will also have the credibility.
2. China benefits more from globalisation
Donald Trump’s campaign slogan, “Make America great again,” has a strong undercurrent of “Fortress America” that looks likely to play out during Trump’s presidency. Trump has promised a sharp shift away from globalisation – via a wall with Mexico, making it more difficult for Muslims to enter the U.S., starting a trade war with China, and many other measures.
This leaves the door open for China to become both the champion, and key beneficiary, of globalisation.
Earlier this week during the WEF, Chinese President Xi Jinping offered a “vigorous defense of free trade… in a speech that underscored Beijing’s desire to play a greater global role as the United States turns inward,” according to Reuters. Late last year he promised that “China will not shut the door to the outside world but will open it even wider.”
This is the first year that a Chinese head of state attended the WEF in Davos, an exclusive conference for elite political and business leaders of the world. Jinping used the platform to draw a contrast between himself and – what seems to be – the crumbling liberal economic order. He presented himself as a leading international statesman and a champion of globalisation.
One of the most important benefits of globalisation is free trade, and China has made it clear that it will be happy to replace the U.S. in any potential trade deals – most notably in the wake of the dissolution of the Trans-Pacific Partnership (TPP) at the hands of the United States. At least two other trade deals, the Regional Comprehensive Economic Partnership (RCEP) and the Free Trade Area of the Asia-Pacific (FTAAP), are in a position to help bind Asia more tightly together – only with China, not the U.S., as the glue.
3. America’s retreat will allow for China’s strategic dominance
In Asia – and elsewhere – the inward shift of Trump’s America will have implications beyond trade. It also means that China’s efforts to deepen its political and economic influence throughout the world will be made all the easier.
For example, China has long been a major investor in Africa. Through its “One Belt, One Road” efforts to create a modern-day Silk Road via investment in a massive infrastructure and transportation network from Beijing to Rotterdam, China is becoming a major investor – with strings attached – through Asia and beyond. And Beijing’s answer to the World Bank and the International Monetary Fund, the Asian Infrastructure Investment Bank, will address a funding and investment needs that will grow larger with less American involvement.
We’ve written before about the slow but inexorable shift of the global political and economic centre, from west to east. If China “wins” during the Trump presidency in these three – and many other – ways, this shift will only accelerate.
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Throughout human history, garlic has been used as a spice and as medicine. It’s a staple in the Asian diet, part of everything from monosodium glutamate (MSG) to desserts. Garlic is believed to aid digestion, protect against viruses – and even ward off vampires.
But today garlic may also serve another purpose – as a warning sign of inflationary pressures building in the Chinese economy.
China is by far the world’s largest garlic producer, harvesting over 25 million tonnes in 2016, to account for about 80 percent of global supply. And the price of garlic has been surging. China’s Commerce Ministry says that garlic bulb prices are up over 80 percent since last year.
The renminbi price of physical garlic started to rally in late 2015. That’s partly due to heavy rains, and then snow, that damaged the crop planted for the 2016 harvest in Shandong province, which is where most of the country’s garlic is grown.
In what has become a familiar pattern in Chinese markets, a jump in price attracted speculative buying, the rising market fed on itself, and prices skyrocketed higher.
However, unlike other commodities targeted by Chinese speculators, there are no garlic futures in China. So to bet on a rise in the price of garlic, an investor has to by actual garlic – that is, the type that people chop up and eat.
Large garlic traders generally set up business in Jinxiang, China’s “garlic capital” in eastern Shandong province. Garlic is easy to grow, harvest, transport and store. Modern cold storage facilities – some bigger than a football field – can keep garlic bulbs fresh for up to two years. This gives investors a long selling window.
There are many stories of traders making millions by going to Jinxiang, buying 5 or 10 warehouses, packing them with garlic from the spring harvest, and then slowly selling as garlic prices rally later in the year.
China’s “great ball of money” on the move
Once again, China’s “great ball of money” has been squeezed out of a bubble market by Chinese authorities, only to inflate other markets, like garlic. How does this work? Faced with a slowing economy, the Chinese central bank has provided easy credit to one sector of the economy after another to help stimulate growth.
For example, in the summer of 2014, margin rates (which are the interest rates brokerage firms charge clients who want to borrow to invest) were reduced to help spur investment in the stock market. This move helped inflate a stock market bubble, as the Shanghai Composite Index gained 125 percent over the next 10 months.
When Chinese authorities decided to deflate the country’s stock market by restricting equities trading, the “ball of money” turned to commodities. Chinese speculators used easy money to buy everything from steel rebar and hot-rolled steel coils to cotton and polyvinyl chloride (also known as PVC). Bubbles in those markets quickly expanded – then popped.
The government then turned to the languishing real estate market. It lowered rates and in effect encouraged speculation, which helped push real-estate prices in China’s “Tier 1” cities (like Beijing and Shanghai) as much as 60 percent higher over the past year.
In a replay of the 2015 stock market boom, in October Beijing tightened credit in the hottest housing markets. And now the bubble money is moving out of tier one real estate into other markets – including obscure commodities like thermal coal, coking coal, Shanghai zinc and garlic.
Garlic – a bellwether of high inflation?
Garlic, though, is a food staple that’s integral to the Chinese diet. Higher prices hurt the spending power of Chinese consumers. And in the past, garlic has been a bellwether of impending China inflation.
In 2007, a spike in garlic prices foreshadowed a jump in China’s CPI (consumer price index, used to measure inflation) from 2 percent to 8 percent over the next year. In mid-2009, rising garlic prices preceded a surge in China’s consumer price index, which peaked in late 2011. Rising prices could put a crimp in Chinese consumers’ buying power – and the government is counting on consumers spending more to drive economic growth.
China’s CPI grew at its fastest pace in six months in October due to rising food prices. The producer price index (PPI) – which measures price changes at the wholesale level – also moved higher, rising 1.2 percent year-on-year last month. This put an end to 54 months of negative PPI growth.
Deflation has been a concern for several months in China. So you might think that the Chinese government would welcome a slight uptick in inflation. The country’s CPI growth target is set at around 3 percent, so October’s 2.1 percent figure is in the range of what the government is aiming for.
However, the worry for Chinese policy makers is that surging prices sparked by speculators in garlic and other commodities might spill over into the general economy. A persistently rising CPI would pose a dilemma for the People’s Bank of China (PBOC), which has been focused on spurring economic growth, and supporting a weakened industrial sector.
Should the recent rise in garlic prices – along with inflation in other vegetable, pork and fuel prices – continue, the PBOC might have to choose between higher rates to dampen inflation, and low rates to support growth.
So don’t be surprised if China cracks down on garlic speculators and other frothy commodity markets. Then the question will be, “Where will China’s ball of money move next?”
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One rare constant in global markets is China’s never-ending stream of contradictory signals.
On the “worry” side of the ledger, consider that. China’s Shanghai Composite stock index is down 11 percent this year. Last week the renminbi reached its lowest levels versus the U.S. dollar since June 2008. And China’s hot housing market is in bubble territory.
But other numbers say that China’s economy is doing just fine.
Earlier this year, we noted four figures that are key to interpret what’s really going on with China’s economy. And the latest numbers suggest that China’s economy is humming along.
China’s manufacturing industry is expanding
The first key figure is the Manufacturing PMI (Purchasing Managers’ Index). This reflects the health of China’s manufacturing sector. A PMI reading above 50 means the manufacturing sector is expanding. Anything under 50 means it’s shrinking.
China is trying to shift its economy to being more consumer-driven – that is, encouraging local Chinese citizens to buy more good and services in China to support economic growth. But China is still the world’s biggest manufacturing centre. So a strong manufacturing PMI number means an important driver for China’s economy is healthy.
The PMI reading for November, 2016 was 51.7, which was the highest reading since July 2014. This means that the manufacturing sector is expanding. And after struggling last year, the PMI has been above, or at, 50 for most of 2016, and has been climbing higher since July, as shown above. China’s manufacturing sector is looking healthy.
Industrial production is holding steady
China’s industrial production measures the performance of the manufacturing, mining and utilities sectors, by looking at the change in the value of what they produce.
As noted below, China’s industrial production growth fell by more than half between 2011 and 2015. But this year, growth has leveled off.
China’s industrial production may never reach the double-digit growth it saw earlier this decade. (It may be impossible… the numbers are just getting too big, as we explained here.) But if industrial production growth holds steady, that’s still a good sign for China’s economy – after years of declining growth rates.
Exports and imports are growing
When China’s October trade data was released two weeks ago, it showed that the total value of China’s exports and imports had increased compared to the year before. It was the first time both imports and exports had increased since October, 2014.
Exports were up a barely visible 0.1 percent – not much, but better than the expected drop of 5 percent. And it’s much better than the 7.3 percent decline in exports for the 12 months ending October, 2016. It was the first year-over-year increase in exports since June, 2015.
And Chinese imports – the amount China buys from other countries – grew more than exports. The value of goods imported in October was up 6.7 percent compared to a year earlier. That’s the fastest growth since September 2014.
Imports grew despite continued weakness in China’s currency, the renminbi, which hit at an 8-year low versus the U.S. dollar last week. When a currency is falling, imports become more expensive. This growth suggests that Chinese consumers, led by the growing middle class, are spending more of their rising incomes on more imported goods.
The Baltic Dry Index has been climbing too
The Baltic Dry Index (BDI) tracks the daily pricing of shipping raw materials (like metals, grains and oil) by sea. It’s often used to measure the health of the global economy, since shipping prices are driven by supply and demand of the materials that are used to fuel the global economy’s demand for things.
It’s also a great way to get an idea of what’s happening in China. That’s because China is the world’s biggest consumer of raw materials. It needs these raw materials to feed its huge manufacturing sector.
So, when the BDI is climbing, it can be a good indicator that China’s manufacturing is ramping up.
The BDI peaked at over 11,000 in May, 2008. That bubble collapsed soon after. It then peaked above 4000 in May, 2010 and went on a steady decline until it bottomed at 290 in February this year.
But the index has rebounded since. It’s now 225 percent higher than February lows. It may never again reach the heights of May, 2008, or even May, 2010. Regardless, the upward trend is a good sign that China’s, and the world, economy is set to grow.
Interestingly, China’s copper imports (one of the world’s most important raw materials) climbed to 380,000 tonnes in November.
That was 90,000 tonnes more than it imported in October and the first uptick in copper imports since March of this year. (But still lower than the November 2015 total of 462,000 tonnes.)
More demand for copper means that there is more manufacturing, building and producing – all good signs for China’s economy.
What it all means
An expanding manufacturing sector, stable industrial production, growing exports and imports, and a climbing Baltic Dry Index all point to one thing – China’s economy is improving or, at a minimum, stabilising.
If these fundamentals continue to improve, it will be a good foundation for China’s economy to grow on. It also bolsters the case for investing in China. To find out more about the best Chinese companies to invest in, and how to do it, click here.
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Legal disclaimer: The insight, recommendations and analysis presented here are based on corporate filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. They are presented for the purposes of general information only. These may contain errors and we make no promises as to the accuracy or usefulness of the information we present. You should not make any investment decision based solely on what you read here.